Requests for Tax Shelter Opinion Letters Denied

The
Tax Court denied a partnership’s motions to compel the IRS to
provide tax opinion letters related to all known “Son of BOSS”
transactions, along with a list of law or accounting firms that have
issued them. The court determined that the information requested by
3K Investments LLC (tax matters partner for plaintiff 3K Investment
Partners) was confidential and was irrelevant to the partnership’s case.

Son
of BOSS, a listed transaction, is a variation of the bond and option
sale strategy (BOSS) in which tax losses are generated by
artificially inflating the basis of partnership interests.

James
Menighan purchased a prepackaged tax shelter from a law firm and
contributed offsetting options on foreign currency through 3K
Investments to the 3K partnership in an attempt to inflate his basis
in the partnership. For the tax year ended Dec. 13, 2000, the IRS in
a notice of final administrative adjustment adjusted the items
reported on the partnership’s return and determined that
accuracy-related penalties under section 6662 would apply to the
resulting underpayments.

In an
attempt to establish a good-faith and reasonable-cause defense to
the penalties, the partnership petitioned the Tax Court and
requested that the IRS produce the letters and list of their
authors. The IRS had previously provided copies of the opinion
letters issued to Menighan by the law firm, Jenkins & Gilchrist, but
refused to provide additional information. The partnership
maintained that the requested information was relevant and would be
used to establish a good-faith and reasonable cause defense by
showing that a large number of national law firms and accounting
firms had taken the same position with respect to Son of BOSS
transactions as the partnership. The Tax Court likened that line of
reasoning to teenagers’ common argument that “everyone’s doing it.”
The facts and merits of the specific case determine the
reasonableness of the position taken on the partnership return
rather than the advice given to other taxpayers, the court said. It
agreed with the IRS that the requested information was not relevant;
it would not lead to discovery of admissible evidence; and it
represented confidential return information under section 6103.

The
partnership argued the letters were not “return information” under
the statute because they were not a return or attachment. However,
the court noted, section 6103(b)(2) defines “return information”
broadly to include data “with respect to a return” or action or
consideration by the IRS regarding a taxpayer’s “tax, penalty … or
other imposition, or offense.” Alternately, the partnership
suggested that the letters could be provided with taxpayer-specific
information redacted. However, the court cited the Supreme Court
holding in Church of Scientology v. IRS (484 U.S. 9 (1987))
that “Congress did not intend the statute to allow the disclosure of
otherwise confidential return information merely by the redaction of
identifying details.”

By
Karyn Bybee Friske, CPA, Ph.D., Pickens Professor of
Business, and Darlene Pulliam, CPA, Ph.D., McCray Professor
of Accounting, both of the College of Business, West Texas A&M
University, Canyon, Texas.

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